Govt refuses to bite the bullet: Rs 7,000 crore of capital budget underspent, level flat since 2013-14

Finance Minister Arun Jaitley outside parliament with the customary briefcase holding the budget speech he will soon deliver

By Ajai Shukla

Business Standard, 2nd Feb 17

On the face of it, the government has hiked defence allocations by Rs 14,748 crore, with the current year’s revised estimates (RE) of Rs 345,106 crore enhanced to Rs 359,854 crore in the coming year. That modest rise of 3.5 per cent is well below the inflation level.

Inclusive of pension, the defence budget accounts for 16.8 per cent of government spending in 2017-18, which will be 2.14 per cent of the Gross Domestic Product. This figure is down from 17.1 per cent of spending and 2.29 per cent of GDP this year.

The drop comes despite the significantly increased salary outgo expected in the coming year, once the recommendations of the 7^th Central Pay Commission are implemented. Added to the increased pension bill triggered last year by the implementation of the One Rank, One Pension formula, the 1.6 million-strong military’s manpower bill will account for over half the defence allocation.

As has become the norm over the last 15 years, the capital budget --- which pays for new equipment and force modernisation --- has been dressed up for the budget party. While apparently increased by Rs 7,281 crore, from Rs 79,207 crore this year to Rs 86,488 crore in 2017-18, about a nine per cent hike, this has been achieved by under-spending the current year’s capital allocation.

The Rs 86,189 crore capital budget allocation this year, is scaled down in the revised estimates to Rs 79,207 crore, which means the defence ministry has underspent its equipment modernisation budget by almost Rs 7,000 crore, some 8 per cent of its allocation.

Defence allocations from 2015-16

	2015-16 (Actual)	2016-17 (BE)	2016-17 (RE)	2017-18 (BE)
Ministry of Defence (MoD)*	11828	13060	15612	14852
Revenue budget (Army)**	100175	110314	114935	121027
Revenue budget (Navy)	14992	17425	17814	18494
Revenue budget (IAF)	21021	23656	23817	24803
Capital spend (Army)	20602	26791	23709	25175
Capital spend (Navy)	19875	22000	19596	19348
Capital spend (IAF)	31198	29795	28210	33556
Total Capital Budget^^	79846	86189	79207	86488
Ordnance Factory Board (revenue)	422	1218	1432	1184
DRDO (revenue)	5798	6728	6663	7266
Pensions	60238	82332	85626	85740
Total defence allocation	294320	340922	345106	359854
Total government spending	1790783	1978060	2014407	2146735
Share of government spend	16.4%	17.2%	17.1%	16.8%
Total GDP	13675331	15065010	15075429	16847455
Share of GDP	2.15%	2.26%	2.29%	2.14%

*    Includes budget for Border Roads Organisation, Coast Guard

**  Includes budget for Rashtriya Rifles and National Cadet Corps

^^  Includes capital allocation for DRDO and Ordnance Factory Board (OFB)

The preceding year, 2015-16, was even more worrying, with the defence ministry under-spending Rs 13,188 crore from its capital budget, almost 14 per cent of the year’s allocation.

There is little to suggest that this year’s allocation will be fully spent. With financial sanctions for procurement controlled by civilian bureaucrats in the defence and finance ministries, the military’s procurement officers openly complain that, towards the end of each financial year, the bureaucrats place an informal block on most procurements, causing the earmarked funds to lapse on March 31.

After the Bharatiya Janata Party (BJP) manifesto promised to expedite procurements, the military hoped this might change. However, the reverse has happened. Compared to the Rs 79,128 crore spent on capital procurements in 2013-14, the last year of the United Progressive Alliance government, the National Democratic Alliance spent Rs 80,884 crore in 2014-15; Rs 79,846 crore in 2015-16; and Rs 79,207 crore in 2016-17, according to the revised estimates.

“The capital budget has flat-lined, which is inexplicable for a country that is growing at 7 per cent. We talk of building military strength, but the reality comes home with every budget”, says a senior general, talking anonymously.

India’s fledgling defence companies, which are critically dependent on stepped up procurement, are similarly unenthused. Says Rahul Chaudhary, who heads Tata Power (Strategic Engineering Division), a company that is at the forefront of defence indigenisation: “The meagre rise in the capital outlay is inadequate for a country with active borders and a two-front threat. India is spending even less on defence that some NATO countries that face no security threats.

In contrast, micro, small and medium enterprises (MSMEs) in defence are welcoming the tax rebate of 5 per cent available to qualifying companies. “The tax rate reduction will lead to greater development of MSMEs and increased participation in defence”, says Puneet Kaura, chief of Samtel Avionics.

While the 1.3 million-strong army faces active counter-insurgency operations and mans a hostile border round the year, its procurement allocation of Rs 25,175 crore for the coming year is significantly lower than that of the Indian Air Force (IAF), which will get Rs 33,556 crore.

Service-wise budgetary allocation

Service	Revenue	Capital	Total	Revenue-to-Capital Ratio
Army	121027	25175	146202	82 : 18
Navy	18494	19348	37842	48 : 52
Air Force	24803	33556	58359	42 : 58

The army, which only recently sign its first contract for critically needed helmets for soldiers, finds itself struggling to provide basic equipment like rifles, bulletproof jackets and helmets. Only 18 per cent of the army’s budget goes on new equipment, compared to 52 per cent of the navy’s and 58 per cent of the IAF’s budget.

The political focus, however, remains on providing sops, rather than equipment. The finance minister had nothing to say on equipment modernisation in his budget speech, mentioning instead a “Centralised Defence Travel System” that the government had set up to allow soldiers to book railway tickets on-line. With soldiers often travelling on leave without reservations, such a facility is likely to be welcomed.

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